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PRIVATE MONEY & TRADITIONAL LENDING SOURCES
By Dave Overman
For new investors just starting
out in real estate, learning all the how to's of effectively locating
properties, hiring contractors and taking a project from A-Z may seem like
a major task and obstacle. However, all of those road blocks are
manageable. With a little education and training, you will no doubt learn
the ropes of real estate and be able to move quickly through your
projects. What you will find to be more important than the basic building
blocks of real estate will be your ability to finance projects. It's very
simple. You can take all the real estate courses available, buy all the
books, CDs and even pick up the T-shirt. But at the end of the day, what
it comes down to is: No Money, No Projects.
There are two typical sources of
financing that most rehab investors use: 1) Bank Financing and 2) Hard
Money Lenders. Depending on the nature of your rehab, these institutions
may work to your advantage. However, it is more likely that these sources
will become a disadvantage and a hindrance to your goal of funding a
project.
Here are some of the disadvantages
of using bank financing or hard money loans as your financial lifeline in
the real estate world.
Financing with Hard Money Lenders:
Know This - Good
credit is a must to obtain a rehab loan from a Hard Money Lender. With
the majority of Hard Money Lenders, if you don't have at least a 630 FICO,
you will most likely find yourself without funding for your deal.
Most Hard Money
Lenders Require A Down Payment - This down payment can range anywhere
between 10%-20%. That's money right out of your pocket before you ever get
one dime from the lender.
Hard Money Lenders
Charge Points - Typically you will find that Hard Money Lenders charge
anywhere between 3-10 points per loan. That's a huge chunk of cash out of
your project and out of your pocket right up front.
Most Hard Money
Lenders Will Require You To Fund The First Phase Of Your Project - For
example if you have a 4-phase rehab loan with $40,000 for repairs, you
would have to finance the first phase of that and come into the project
with over $10,000 cash out of your pocket. This is in addition to paying
your closing cost, points and down payment.
The bottom line is, most people
don't have $20,000 cash to get started with in this business. For these
reasons, I say that hard money loans can become a serious road block and
disadvantage to both beginning and seasoned real estate investors.
Bank/Conventional Lending:
With bank lending, you must show a
strong FICO score, W2s and statements of earnings. Again, you must be
approved by the lender.
With some banks, if you have too
many properties on your credit report, they will often turn you down for a
loan.
Banks can typically take between
two weeks to a month to finance a loan. These time constraints can really
mess up a great deal that must close now.
Banks typically will not finance
distressed properties.
If the home is in disrepair, it
will need to be brought up to code before they will finance the home.
With these restrictions and
requirements, it may be that some people with great potential will walk
away with shattered dreams of ever becoming a real estate investor. But
that's not the way it has to be. For those just starting out or those of
you who have already been down this path of denial from banks or hard
money lenders, I am confident that private mortgage lending and the use of
private money will become your key to enter the “Rehab World” in a big
way.
Some Benefits of Using Private
Money:
1) There Is No Restricted
Criteria - It doesn't matter what your credit score is or what you have in
the bank. If you know how to get the job done and convince a private
lender of it, you will receive the loan.
2) With Private Money You
Have Control Of Your
Deals - When you take a hard money
loan or conventional loan, the lender is in control. With private money,
you are in complete control. You set the interest rate and the time
frame.
3) Immediate Closing -
With private money you will have available funding to begin your project
immediately upon closing.
4) With Private Money You
Will Have Recyclable Funds - This is the best part, as soon as you are
done with the first transaction, you will have a ready loan that you can
put right back into play. There is no hassle of submitting your paperwork
to see if you get approved for a loan and there is no hoping you get the
funding. You will have people literally waiting to put their money back
into play with you.
Private mortgage lending is truly
an untapped resource for all your funding needs in the real estate arena.
And the best part is there can literally be an endless supply of private
funds if you tap the right market.
Why People Will Want To Fund Your
Deals:
1) CDs are at an all-time
low, offering less than 5%. Stocks, 401(k)s and IRAs are volatile and
constantly changing. These are not bad investments. However most of them
cannot offer a safe, secure and dependable rate of return for their
investment.
2) Private lending works
with a solid asset that maintains a moderate stability, unlike paper
assets that are constantly going up and down with the market.
3) Private lending has a
security factor. All transactions are backed by a first position
mortgage, tied in with a promissory note and every deal lists the lender
as the mortgagee on the hazard insurance policy. Compare this to the fine
print of a stock, IRA or 401(k) which states that you can literally lose
everything.
4) Not only will you
provide all the security documents to the lender, but you will also never
over finance your project. Sticking with the 70-75% rule will give your
lender the added security of knowing his or her loan carries not only
their principal but also 25-30% equity.
Again, there are so many wonderful
options in the world of Private Money. Let me ask you a question - have
you ever stopped to consider that all the funding resources you need may
be alive and ready right now inside of your circle of influence?
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Dave Overman is active investor in
NW Indiana. To learn more about private money, visit
www.rehabloantree.com and click
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